Why Must Unregulated Mean Unacceptable?

Not content with undermining the banks, the Fed says it wants to "support" non-bank
lending too...

The Wall Street Journal ain't what it used to be, but it still maintains a
significant position in reporting the financial markets.

My favorite section money and investment is a shell compared to what it was
like 20 years. Still, many times there are gems to be read. Last week under
the section Heard On The Street was a piece written by David Reilly
entitled Too
Big to Fail Casts a Very Long Shadow - and it put real fear in me.

It picked up a comment made by New York Fed President William Dudley earlier
this month advocating the
Federal Reserve extending financial support for "the shadow banking industry".
The term used is a misnomer to present the readers that there is something
nefarious going on in the outskirts of the banking industry. These are private
sector businesses that lend to the public outside of the traditional banking
structure.

Why is the Fed even considering this? I believe it is the limit the competition
to the banking industry.

Put simply, as this
recent paper does, "Shadow banks are financial entities other than regulated
depository institutions (commercial banks, thrifts, and credit unions) that
serve as intermediaries to channel savings into investment."

What's important for a definition of shadow banking is that the lenders are
not commercial banks. So they are "unregulated", which means to most commentators
and regulators today that shadow
banking is also "freaky". Dudley says the same, suggesting that "the existing
state of affairs is not acceptable in financial stability terms." His proposal?

"The first option would be to take steps to curtail the extent of short-term
wholesale finance in the system...Additional legislation or regulatory changes
could be implemented to reduce the volume of [shadow banking]. The other path
would be to expand the range of financial intermediation activity that is directly
backstopped by the central bank's lender of last resort function."

Entertaining these concepts, we see they are in truth one and the same - and
in reality this concept is already a failure. The involvement of the Fed in
regulating and back-stopping the banks has not been fortuitous. Guarantees
giving the financial firms support in crisis do nothing but undermine the very
responsibility that the management of said organizations should have. No regulations
as we have seen from recent history will prevent mismanagement and over lending
when these guarantees are in place.

Back to reading the Wall Street Journal, and I nearly fell off my chair
when I read the following paragraph:

"As things stand, many players in shadow-banking markets are having their
cake and eating it. They haven't been subject to much greater regulation, yet
enjoy an implicit guarantee the Fed and government will step in should another
crisis hit."

What implicit guarantee is Mr. Reilly speaking of? How do these non-regulated
players happen to have this guarantee? I never heard about it, implicit or
otherwise. Since when are these firms not allowed to fail? Why does any government
organization need to support these private businesses?

It is the market and the threat of failure that prevents businesses from failing.
The more the government and quasi-government agencies such as the Fed support
businesses by giving them support of any monetary substance, it only increases
the chances of failure. Organizations such as the FDIC are, by their very nature,
incapable of creating a secure business environment, as the
2006-2009 mortgage and banking meltdown proved. It is only basic business
practices that can ensure the success of any entity - not government meddling.

Still, the fact that such extra support is being considered in Washington
(and taken for granted at the WSJ) only exacerbates the current situation.
It is quite apparent that the Fed is seeking to grow their already overreaching
power. The mentality of our current authorities in monetary matters is to impose
more and not less.

If this idea proceeds in any manner in the "shadow banking markets", I can
only foresee a continued collapse in the value of the Dollar. Because the cost
of guaranteeing yet another set of risk-takers will be shared equally by everyone
holding the US currency.

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